Courtesy of Mark Saltzburg, a member of the Delaware Bar now working in the northern Virginia office of the Squire Sanders firm, we have a summary of remarks made by Delaware Supreme Court Chief Justice Myron Steele at the Spring meeting last week in D.C. of the Business Law Section of the American Bar Association, concerning developments in Delaware corporate law and recent Delaware Supreme Court cases. Here is Mark’s summary:
First, Chief Justice Steele noted that the Delaware Supreme Court had just heard argument in the Trenwick America Litigation Trust litigation that may result in a decision on whether creditors may bring a cause of action for violation of fiduciary duty where a company deepens its insolvency in a way that further damages creditors after any residual interest of shareholders is out of the picture.Ě Typically, fiduciary duties are only owed by directors to shareholders and not to creditors. Steele noted, however, that in an earlier decision by former Delaware Court of Chancery Chancellor William Allen in the Credit Lyonnais case, the court commented that directors may owe creditors a fiduciary duty where a company is in the vicinity of insolvency.
Second, Steele discussed whether the Delaware courts will hold directors to a higher standard of judicial review based on the background and training of a director. He rhetorically asked the question of whether the Delaware courts have moved away from a group analysis of fiduciary duty.Ě He noted that, in the recent Emerging Communications case, the court appeared to hold a director with an investment banking background to a higher standard and he noted that, in the recent Disney executive compensation litigation, the court examined the conduct of the board on a director by director basis. Steele said that neither case heralds a move away from the traditional Delaware analysis of the board as a whole. He said there is no separate standard based on the training and background of a director. He said, however, that courts would apply conceptual nuance based on the participation of a board member.Ě
Third, Steele noted that while the Delaware courts provide for different procedural standards in litigation depending on the insider status or outsider status of directors, the Delaware courts take the view that to be an insider is a not a crime, it is a status.Ě He noted that insiders often bring advantages to a board of strategic advice and familiarity with the business. He said that to take a different view would be to risk leaving a board bereft of those board members with the best expertise and knowledge of the business.
Fourth, Chief Justice Steele noted that, in the stock-option back-dating cases currently before the Delaware Court of Chancery (at the trial court level), the cases will likely involve issues of lack of good faith by board members involved. He noted that past Delaware jurisprudence on the issue of good faith, including the Disney case, indicate that two prongs of analysis will be important in such cases: 1) whether directors intentionally used inside knowledge in such a way as to preclude them from acting loyally and in good faith, and 2) whether directors concealed information. Steele further commented that lack of good faith, while difficult to define with precision, has evolved to mean that a director consciously disregards a known duty.
Finally, Steele noted that, in the case Stone v. Ritter (also referred to as AmSouth), the Delaware courts had embellished the oversight concept of directors’ duties first enunciated in the earlier Caremark decision. He noted that the directors in the case were directors of a bank who were alleged to have failed to supervise or develop processes to monitor employee conduct which resulted in the imposition of a $50 million fine on the bank. The court dismissed the case on the grounds that no sufficient claim was plead in the complaint. Steele noted that the complaint was dismissed because it failed to allege that there was an utter failure to install an information monitoring system and because there was no evidence that directors disregarded any red flags that might amount to a conscious disregard of fiduciary duties.
UPDATE: Compare recent comments, by coincidence, just posted here by Prof. Bainbridge on both the Stone v. Ritter and Caremark cases.
UPDATE II: The good professor follows up with insightful commentary here.